Posted by Tim Armstrong, President, Advertising and Commerce, North America

As Hal Varian wrote earlier this week, there's been some recent discussion about the impact of our recent advertising agreement with Yahoo!. While Hal addressed a recent study about the deal's potential impact, today I wanted to address of a few of the questions that advertisers and others have raised about the deal's impact on ad prices. Here are the facts:

Question: Will the Google-Yahoo! agreement raise ad prices?Answer: Neither Google nor Yahoo! set ad prices. Ads are priced by an auction where an advertiser only bids what an ad is worth to them. Furthermore, ad price is only one part of the story. A more important measure for advertisers large and small is the return on investment of their advertising dollar. The Google-Yahoo! agreement will help advertisers convert more clicks into customers by showing more relevant ads on Yahoo!, giving advertisers a better return for every dollar they invest.

Question: Yahoo! claims they will make an extra $800 million from this deal. Does that money come out of advertisers’ pockets?Answer: There are two main reasons Yahoo! is likely to earn more revenue. One, the deal will allow Yahoo! to show more ads on pages where they previously showed no ads or only a few ads. Two, advertisers will get more clicks on ads because the quality and relevance of those ads will be better. As is true today, advertisers are ultimately in control of how much they spend because they only pay what an ad is worth to them. So consumers will see more relevant ads and advertisers will attract more customers as a result.

Question: Can Yahoo! pick whose ads to show based on who has the highest price?Answer:No. Under the terms of our agreement Yahoo! won't be able to see the current auction prices for Google ads, and Google won't be able to see Yahoo!'s prices.

Question: Can Google and Yahoo! use minimum bids to set a unified price floor for ads?Fact: No. Google and Yahoo! will continue to set minimum bids in their auctions independently. Google uses minimum bids to help advertisers know what they need to bid in order to have a realistic hope of having their ads shown. Minimum bids also help deter low quality spam ads. Google has never based minimums on what competitors are doing and this agreement won’t change our approach to minimum bids in any way.

Question: Does Google's quality score effectively raise prices for ads?Facts: A quality score helps ensure that users see the most relevant ads not just the most expensive. All the major search engines, including Yahoo! and Microsoft, assign quality scores. Quality score is a formula that reflects which ads consumers prefer based on how they respond to the ads. By including quality score in our advertising system, smaller companies can more effectively compete with larger businesses by creating highly relevant ads and websites.

Tomorrow we'll address some of the questions and misconceptions about the deal's impact on competition.